6/03/2009 @ 7:45AM

Reality Check For Latvian Realty

LONDON – Whenever Sanda Mikelsone struck up a conversation in a bar around this time last year, there was always a good chance she could walk away from a potential customer. She’d just become a realtor with Latvia’s Arco Real Estate two years prior–her first full-time job–and was already selling at least one house or plot of land a month. Now she’s lucky to sell one property every six months. “It’s very hard,” she says. “Nothing is going on.”

Mikelsone still tries her luck with people she meets at parties or bars, but it’s tougher to get people interested, and the phones at her office rarely ring. “We can put advertisements everywhere, but no one will call.”

Latvia is now one of the worst casualties of the credit crisis in Europe and its overheated property market is behind the collapse. Once one of the fastest growing markets in Europe, house prices in the capital city of Riga have plummeted 50.4% in the last year, according to Arco’s own statistics.

The country’s capital recently ranked at the bottom of a survey of global house prices in the first quarter of 2009. “This must be unprecedented, surely,” says Matthew Montagu-Pollock, owner and founder of Global Property Guide, which made the rankings. He might not have gotten the figures on Latvian property were it not for Arco’s data — as yet there are no official statistics available for Baltic neighbors Estonia or Lithuania. “But I assume they also have similar problems.”

“I’m the type of person who is hard to surprise but let’s say this drop was more than I expected,” says Victors Savins, chairman of Arco Real Estate, who appreciates that the crisis has put Latvian home owners in a difficult position. Many are reluctant to go to their banks to refinance their mortgages as it can often mean a hiking of rates and doubling of their monthly payments, even though the Latvian central bank has set rates at 5%. With borrowing rates so high, loan-to-value ratios on houses can be twice as much as a home’s market value, whereas in a more balanced market they would be at 75%. It means house buyers find it much harder to get banks to approve a mortgage.

Land prices are the worst hit, down by 70% in some areas since March 2007. Mikelsone says she’s seeing house prices fall by about 3% each month and apartment prices by 5% a month. “Nobody knows when it’s going to finish,” she adds.

Savins is hopeful: “Some people say the property market is dead. But I would rather believe that it’s on hold.” Still, he thinks it could be another five to 10 year before Latvian property prices recover. Somehow, his company is also muddling through. Arco Real Estate is a subsidiary of the Arco Vara Group, which reported net loss of 900,000 euros ($1.3 million) in the first quarter, a 12% narrower deficit from the previous year. One reason: The company has aggressively cut costs, reducing its staff to 259 people, from 654 this time last year.